By Keith Norbury

A year after a bumper grain crop in Western Canada clogged the nation’s transportation systems, farmers and grain handling companies are still having trouble getting their crops to market. “Demand for rail cars is exceeding the supply of rail cars for grain,” said Wade Subkowich, Executive Director of Western Grain Elevator Association, which represents Canada’s major grain handling companies.

He now knows from week to week just how far that demand is outstripping supply, courtesy of the recently formed Ag Transport Coalition, of which the grain elevator association is a part. (Other coalition members include the Alberta Wheat Commission, the Canadian Canola Growers Association, the Canadian Oilseed Processors Association, the Inland Terminal Association of Canada, the Manitoba Pulse Growers Association, and Pulse Canada.) Among the coalition’s efforts is producing weekly performance measurement reports of how well the railways are doing, or not doing, in moving Canada’s grain. The coalition has received funding from Growing Forward 2, a five-year federal-provincial initiative of Agriculture and Agri-Food Canada that focuses on improving agricultural markets. Growing Forward 2 made possible the coalition website, where the reports can be downloaded by anyone willing to register on the site. “It was all about transparency and all about data measurements,” Mr. Subkowich said. “If we don’t have good information, then we don’t have a good concept of the problem.”

Railways respond to coalition allegations

Canada’s two major railways don’t see it that way. Canadian Pacific Railway, in a Jan. 30 news release, ripped the coalition for failing to include “transportation partners in the discussion.” “The use of public funds to drive a single, self-serving agenda under the guise of solving large, complex supply chain issues is unconscionable,” the railway’s CEO, E. Hunter Harrison, said in the news release. CP called on the coalition to communicate with all the other supply chain links, including terminals, ports, and elevators. “It is our belief that any discussions about commodity movement should include all pieces of the supply chain puzzle,” Mr. Harrison said in the news release. “It is disingenuous for the Ag Transport Coalition to say it wants to improve the agricultural supply chain if it doesn’t want to involve transportation stakeholders in the discussion.” The release added that CP’s innovations to improve speed and efficiency, such as its Dedicated Train Program, resulted directly from “consultation with, and input from, shippers and producers of agricultural products.”

Meanwhile Canadian National Railway in a recent update on Western Canadian grain, said it doesn’t accept Ag Transport Coalition’s analysis and claims, calling them “neither comprehensive nor transparent.” CN added that the coalition’s order fulfillment data “appear to be based at least partly on ‘phantom orders’ carried in a ‘shadow order book’ maintained by and only visible to the Ag Transport Coalition or its contractor.” The update went on to explain that in March 2014 “so-called unfilled orders reached an unprecedented level, well beyond the capacity of the overall supply chain” and that “tens of thousands” of those orders ended up being cancelled. CN says that it instituted a new system in September 2014 to address the problem of grain companies using phantom orders to jockey for market share. Among the new system’s provisions is that “valid car order requests must now specify the origin and the destination unloading facility (for destinations served by CN), or the interline gateway (for destinations served by another railway).” Outstanding requests also cannot exceed twice the capacity of a loading facility or site. However, the rules do allow for larger order requests so long as the shipper provides CN “with ample forward visibility to plan service and deployment of its assets and resources at times when the grain supply chain is in high gear, and provide grain shippers with the means to communicate priorities.”

Finger pointing prevails a year after bumper crop

The spat over the coalition is only one of the more recent examples of finger-pointing in the wake of the bumper grain crop of 80 million tonnes that overwhelmed the transportation system during the 2013-2014 crop year. Last year at this time, Mr. Subkowich and other industry insiders predicted that the railways wouldn’t be able to ship all that grain by the time the 2014-2015 crop year began on Aug. 1. The prediction proved correct. He estimated the surplus at about 16 million tonnes. That surplus combined with a grain harvest of about 60 million tonnes in the current crop year places the system is in much the same predicament it was in a year ago. “But it’s hard to know how much of last year’s grain is left versus this year’s crop,” Mr. Subkowich said. “It’s fluid. It just gets mixed.”

The surplus did, however, mean there was grain for the railways to move in August 2014 and early September in advance of this fall’s harvest. So that has made the weekly averages for grain shipments higher than they would have been in a year without a surplus and no grain to move in the first two months of the crop year. “So it stands to reason that we’ve moved more grain to date,” Mr. Sobkowich said.

It’s important to examine the data closely week by week rather than just concentrate on averages, Mr. Subkowich said. “It’s like saying, I have one foot in a block of ice and another foot in a campfire and on average I’m comfortable,” Mr. Subkowich said, noting that it takes about two weeks of planning to arrange a sale of grain.

According to Ag Transport Coalition’s report for Grain Week 28, which ended Feb. 14, total unfulfilled shipper demand for the year had reached 22,884 cars, while the net unfilled demand — “orders that shippers continue to expect the railways to supply, excluding orders associated with rejected cars, denied orders and railway cancellations” — stood at 10,685 orders. The shortfall of those 22,884 hopper cars represents about 11 per cent of shipper demand, the report noted.

“The number of hopper car orders not filled by CN and CP has continued to increase each week since the beginning of the crop year; overall, unfulfilled orders have levelled off at about 10 per cent of total shipper demand in recent weeks, indicating that the railways are not making up ground for prior weeks’ shortfalls,” the Ag Transport Coalition report continued.

The reports also examine dwell times. For example, origin dwell time measures how much time elapses between a shipper releasing loaded cars and a railway physically pulling the cars from a shipper’s siding to move them to the destination. Bulk grain shippers expect the origin dwell time to be less than 24 hours in order to avoid railway demurrage charges, Ag Transport Coalition maintains. Meanwhile, destination dwell time measures how long it takes a rail car upon arrival at the destination yard to be placed at the receiver’s unloading facility. As of week 28, 34 per cent of bulk grain shipments had waited for more than 48 hours at origin for pick up while only 28 per cent of shipments were picked up within 24 hours, the report said.

CN, however, said that in early February its waitlist for Western grain hopper cars was just over 1,800 cars – down from around 3,000 at the end of December.” That, the railway added, “represents only a few days’ worth of car supply based on CN’s average run rate for spotting Western grain hoppers in the 2014/15 crop year to date.”

Mr. Subkowich said the coalition’s data speak for themselves. However, it’s difficult to make comparisons with previous years because those measurements weren’t in place until this year. In fact, the coalition’s reports didn’t begin until Grain Week 21.

It’s all about car supply

The grain transportation system is driven by car supply, which is where the bottleneck is, Mr. Subkowich said. If the car supply were greater, grain companies and farmers could sell more grain at peak price periods as well as more grain to the premium U.S. market, he said. “But we find that car supply is set at a percentage or some level shy of demand so that the railways enjoy 100 per cent utilization of their assets,” Mr. Subkowich said. “No business in a normal functioning marketplace, no business that intends on growing its business, can function without some excess capacity.”

Meanwhile, yet another coalition, this one consisting of Saskatchewan agricultural groups, recently commissioned a report that concluded the railways in the 2013-2014 crop year earned $322 million over and above the 20 per cent level “deemed fair and adequate under the Western Grain Transportation Act.” That excess worked out to $8.36 per tonne, said the Travacon Research Limited report, which was commissioned by a coalition consisting of Agricultural Producers Association of Saskatchewan (APAS), Saskatchewan Wheat Development Commission, Saskatchewan Barley Development Commission, and Saskatchewan Pulse Growers. Based on the report, the coalition conservatively estimates that the railways earned about $2 billion in excess grain charges from 2008-2014, said news release announcing the report. “What these numbers mean is that grain producers are being overcharged — grain is paying full freight, and then some,” APAS President Norm Hall said in the release. “As part of the ongoing review of Canada’s grain transportation system, we need a full costing review to determine fair costs for freight.”

In December, that same coalition submitted 38 pages of recommendations to amend the Canadian Transportation Act to address the $5 billion that the group estimates Western Canada grain producers have lost and stand to lose because of “failures in the transportation and handling systems” during the 2013-2014 crop year and the current one. That $5 billion is what Richard Gray of the University of Saskatchewan estimated is the additional grain export basis farmers have had pay the last two years.

Grains companies also field blame

Not everybody with an interest in grain transportation thinks the railways are to blame for the system backlogs, or are its major culprit. Bob Gehl, who chairs Saskatchewan Wheat Development Commission and formerly chaired Canadian Wheat Board Alliance, says the grain companies are just as culpable. So does Dr. Barry Prentice, a professor in the supply chain management department at University of Manitoba’s Asper School of Business. The federal government also takes heat for its role in the debacle. However, in that case, Mr. Subkowich and Mr. Gehl think more railway regulation is the answer, while Dr. Prentice maintains that the regulatory measures of the federal government are making matters worse.

Another culprit by Dr. Prentice’s thinking is the railway revenue cap, introduced in 2000, years before the current Conservative government came to power. It established the maximum that railways can charge to move grain based on the volume and distances moved, Dr. Prentice explained. Exceeding the cap results in hefty fines. Undershooting it means the railways just don’t receive that revenue. “Effectively what it does is it creates a fixed average cost,” Dr. Prentice said. “So the railways don’t change their pricing around a lot because they can’t really.”

As a result of that fixed price, when a huge crop causes high demand in the fall, the railways can’t keep up. The cap serves as a rationing mechanism but provides no incentives to invest in new technology or expand the fleet, Dr. Prentice said.

Last March, in response to the grain transportation troubles, the federal government issued an order that required each of the two major railways to ship at least 500,000 tonnes of grain each week or face fines of up to $100,000. The government subsequently passed the Fair Railway for Farmers Act, which included that provision, but which Dr. Prentice called an “ill-thought out government policy”, just like the revenue cap. “They never did anything to help the surge and if we have a surge next year we’ll have the same problem because none of the regulations that have been put forward do anything to help because you cannot expand the existing system,” Dr. Prentice said.

The new Act’s provision to increase to 160 kilometres the “interswitching radius,” which enables a shipper to switch carrier for part of the journey, is “another backfiring policy,” he said. “All it does is eat up capacity on the Canadian system and then move the grain to the American system, which weakens the Canadian railways, which then don’t have money to invest in the rest of the system,” Dr. Prentice said.

The federal government had earlier passed the Marketing Freedom for Grain Farmers Act, which stripped Canadian Wheat Board (CWB) of monopoly power and was supposed to increase competition. However, the way Dr. Prentice sees it, the government’s response since then has undermined those efforts. “It’s so ironic. Here we have a Conservative government that is actually putting in place more communist types of policies for grain transportation instead of having a free market. In fact, they have a fixed priced and a rationing system for the cars and we have a quota system for the railways to deliver. Stalin would smile upon this system,” Dr. Prentice said.

Fines are fine, say grain growers

Grain farmers, however, are happy that the government is penalizing railways for lack of performance, said Gary Stanford, President of Grain Growers of Canada. “It doesn’t matter to us how much the penalty is,” said Mr. Stanford, who has a 5,000 acre farm near Magrath, Alta., about 30 kilometres south of Lethbridge. “It’s just the fact that they are getting penalized because that way it looks bad for them that they’re not doing the work they should.” Mr. Gehl said the federal government’s new penalties that fine railways $100,000 a day when they fail to move their quotas grain have actually hurt small and medium sized farmers who aren’t close to a main rail line. “You can forget about getting a producer car or you can forget about the small shippers getting cars,” Mr. Gehl said. That’s because the railways have a disincentive to spot cars anywhere unless they can spot 100 or more at a time, he said. “We had mills in Ontario last winter running out of wheat,” Mr. Gehl said. “For gosh sake, we’re one of the finest producers of wheat in the world and our own domestic mills can’t get product? That’s a problem.”

While Dr. Prentice says fines and revenue caps on the railways are working against efficiencies, he nevertheless says consolidation of the grain elevators might be one of the best things ever to happen to farmers. “Under the old system they were moving grain from their farms to these local elevators in five- and 10 ton-trucks,” Dr. Prentice. That was low utilization for those trucks. Now the grain moves in tractor-trailers, which costs more, but frees up farmers to manage their holdings. “And some of these guys are very big farmers now,” Dr. Prentice said. “They don’t have time to drive a truck.”

Meanwhile, Mr. Gehl’s litany of complaints includes problems with ships waiting at port, and sometimes having to move in and out of berth five or six times to fill their holds. “You have added demurrage and, of course, all those berthing costs as well,” Mr. Gehl said. “Those are issues that are compounding a whole bunch of other logistical problems.” He blamed much of those logistical problems on the neutering of CWB which formerly exercised de facto control over the movement of wheat and barley to the ports. “And they could make sure that that grain got there in the proper shipping week,” Mr. Gehl said.

Mr. Subkowich said it’s a red herring to bring up the Wheat Board. First of all, he doesn’t see it regaining its monopoly. Secondly, he said, grain companies are now more efficient because they can plan their own logistics for all crops, just as they have always done with canola, instead of having the Wheat Board steer the movement of wheat and barley.

Coalition recommends railway regulations

Yet despite their divergent views, both Mr. Gehl and Mr. Subkowich agree that the solution to the transportation problems is more regulation of the railways. “We need to have some authority in place that can match what we’re growing to the amount of capacity that’s in the system,” Mr. Gehl said. In its submission to the Canadian Transport Act review panel, the Saskatchewan grain producers’ coalition makes several recommendations, which include:

• “a formal costing review” and adjustment of the maximum revenue entitlement;

• a commitment from the federal government to keep the maximum revenue entitlement “to ensure fair compensation to railways for hauling grain”;

• legislation to provide mandatory information reporting “for the grain handling and transportation system to function effectively”;

• creation of a rail oversight group;

• creation of a meaningful dispute resolution mechanism;

• enhancing the use of running right provisions in the act;

• changing the act to “support small shipper innovation, diversification and investment”;

• recognizing the needs of producer cars shippers and shortline railways in legislation; and

• empowering the Canadian Transportation Agency “to investigate and rule on a railway’s genuine ‘operational interest’ in underserviced and unused rail lines in which other parties have expressed an interest.”

Because Canada is the northern part of the wheat production zone, output varies from year to year, Mr. Gehl said. So it’s critical to match production in a timely manner to customers’ needs, as well as provide quality assurance because the world marketplace relies upon Canada for that. “Even with all these problems that we’re having, customers are still coming to Canada, wanting Canadian wheat,” Mr. Gehl said.

Mr. Subkowich said the grain companies want to see regulatory changes that mimic competitiveness and cause railways to move more grain. “What we feel is necessary is a better definition of adequate and suitable accommodation in the Canada Transportation Act,” Mr. Subkowich said. “That’s a critical piece. And the second thing is to be allowed to have financial consequences for non-performance or inadequate service spelled out in service agreements.” As it stands, the grain companies can’t charge railways when they fail to provide rail cars on time, Mr. Subkowich said. As for those $100,000 penalties, Mr. Subkowich characterized them as “more of a token than anything” and “pocket change for a railway.”

Containers can provide surge capacity

Dr. Prentice of University of Manitoba said the troubles with Canada’s grain transportation system boil down to a question of surge capacity. His solution, which he outlined at the 19th annual Fields on Wheels Conference in Winnipeg in December, is to employ shipping containers whenever a bumper crop overwhelms the system. “You can’t solve this with regulations because what you have is a limited resource, which is rail cars,” Dr. Prentice said. And even if the system had all the rail cars it needed, it would back up at the grain elevators because they lack the capacity to handle a 30 to 40 per cent increase above the average crop.

“Containers operate outside the normal grain handling system, because the grain never has to go to a grain elevator or touch a hopper car,” Dr. Prentice said. “So you can get the maximum utilization of the existing system. Plus we have an almost perfectly elastic supply of containers overseas.”

Modern farms are so large that they resemble small grain companies in their own right, Dr. Prentice pointed out. So they’d easily be able to store, move, and fill containers. Australians are using plastic liners to protect wheat, which is often shipped to Asia, he pointed out. “I think it’s a good idea because you never know what was in the container before,” Dr. Prentice said.

Grain can also be shipped in containers just by using a customized bulkhead to keep the grain from spilling out the doors, said Adrian Samuel, President of Coast2000 Terminals Ltd., which operates a container yard, rail yard, and warehouse in Port Metro Vancouver. Filling a container would require some type of elevation facility — “but there’s plenty of those on the prairies,” Mr. Samuel said — as well an apparatus to tilt up the box. “And then you just open up the back doors and fill it up,” he said. That part is easy. Getting the containers to the Prairie farms would be the hard part.

“Steamship lines won’t want them there,” Mr. Samuel said. “They won’t have a need to have them there unless somebody wanted to go out and buy a whole bunch of them. But then, as you can imagine, once Mr. Farmer has filled up his container with grain and sent it off, how is he going to get it back?” Yes, a lot of containers arrive from Asia with all those consumables that stock store shelves. But most of the containers are either destuffed in Vancouver for distribution by truck or railed to large population centres like Toronto or Chicago. “Once that container’s been destuffed, then that container becomes available. But there just isn’t the density of demand for any of those containers to stop on the Prairies and be destuffed there,” Mr. Samuel said. “That’s the biggest challenge for that economic model.”

It’s a dilemma that Dr. Prentice noted: It often makes economic sense for a container to return empty to Asia. “If you’re making twice as much on the front haul as you are on the back haul, then waiting around extra time to find a low-paying load to go back may not be as economic as just coming back empty and getting another high-paid load.” Nevertheless, he pointed out that the newest generation of massive container ships are capable of handling 20,000 TEUs, which he calculated would take about 40 mile-long unit trains double-stacked with containers to fill. A ship loaded with dense cargo like grain would probably only carry half its limit of containers, lest it sink to the bottom. Even so, the ships are so huge that they’re going to be hungry for cargo, Dr. Prentice said. And grain, which he expects will be in increasing demand, can help sate that hunger.

“You look at the total logistics costs from the farm right to the baker, then I think that moving containers can actually save money — especially for small companies in foreign countries because they can get their deliveries in smaller lots on a just-in-time basis,” Dr. Prentice said.

And as it turned out, Mr. Samuels said, the container terminals in Vancouver weren’t set up to handle the huge volumes of grain last year. Nor did transloaders have the capacity to handle containers either. It wasn’t exactly a supply chain failure, he said, “but it certainly strained the supply chain.”